EPA Decision on E15 Could Have Bullish Impact on Ethanol

by: Biofuels

The market consensus is that the EPA will approve, within the next two weeks, E15 for vehicle model years of 2007 and newer, which would be a significant bullish long-term factor for ethanol prices. The DOE is not expected to finish testing model years 2001-06 until the end of November.

Ethanol Market Action - November CBOT Ethanol futures prices last week fell sharply to post a new 3-week low and close 15.5 cents lower (-7.8%) at $1.842 per gallon. Bearish factors centered on heavy long liquidation pressure and the 10.7% plunge in corn prices. The sharp 7.5% rally in gasoline prices last week provided some underlying support and allowed ethanol prices to at least fall by less than corn prices (-7.8% for ethanol versus -10.7% for corn prices).

Weekly ethanol production and inventories decline -- Ethanol prices received some underlying support last week from the weekly EIA report showing that ethanol production fell by 2.9% in the week ended Sep 24 to 825,000 barrels/day (bpd), the third consecutive weekly decline. Ethanol production is now 5.7% below the record high of 875,000 bpd posted in the Sep 3 week. In addition, ethanol inventories fell by another 2.0% to 17.164 million barrels, the lowest since December 2009 and down by 13.8% from the record high posted July 2. The monthly EIA ethanol report released last week showed that ethanol production hit a record high of 857,000 barrels per day in July, but that was old news considering that the EIA is now releasing weekly data. The industry in July operated at the very high level of 97.2% of capacity. Since July, the industry has boosted its capacity by 1.8% to 13.765 billion gallons per year, according to the Renewable Fuels Association.

Ethanol/Gasoline – November gasoline futures prices last week rallied sharply to close 14.57 cents higher (+7.5%) at $2.0861 per gallon. Gasoline prices rallied on the 8-month low in the dollar index, the recent improvement in U.S. economic data, and last Wednesday’s news that DOE gasoline inventories in the week ended Sep 24 fell by 1.5%. The 7.5% rally in gasoline prices last week, combined with the 7.8% sell-off in ethanol prices, allowed ethanol prices to become cheaper again relative to gasoline. The spread of Nov ethanol prices minus gasoline prices fell sharply by 30.1 cents to -24.4 cents, which means ethanol is 69.4 cents cheaper than gasoline including the 45-cent ethanol tax subsidy.

Ethanol/Corn – December corn futures prices last week fell sharply from the previous week’s 2-year high and closed 56.00 cents lower (-10.7%) at $4.6575 per bushel. Bearish factors centered on heavy technical long liquidation pressure by speculators, harvest selling by U.S. farmers, and the USDA’s Sep 30 report showing that corn inventories on Sep 1 were at 1.708 billion bushels, which was 322 million bushels higher than the USDA’s Sep 10 estimate. As of Sep 26, 27% of the U.S. corn crop had been harvested, which was 12 percentage points ahead of the 5-year average of 14%. The early harvest reduces the risk of frost damage. The fact that ethanol prices last week fell by less (-7.8%) than corn prices (-10.7%) meant that the Dec ethanol-corn crush margin rose by 5.9 cents to 16.9 cents/gallon. Including DDG, the Sep corn for ethanol crush margin rose by 5.9 cents to 52.0 cents/gallon.

Ethanol Calendar
- Oct 6: EIA Weekly Petroleum Status Report
- Oct 8: USDA WASDE Crop Supply-Demand
- Early to mid Oct: EPA’s E15 decision expected for 2007+ model vehicles (early-Dec decision expected for 2001-06 models)
- Oct 28: EIA July Monthly Ethanol Report

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